Tom Clendon explains a new international standard that he’s sure will be on the examiner’s agenda.
The question
What’s this new standard IFRS 18 all about?
Tom’s answer
It has been a while since we’ve had a new international financial reporting standard. IFRS 18 ‘Presentation and Disclosure in Financial Statements’ replaces ‘IAS 1 Presentation of Financial Statements’.
As the name of IFRS 18 suggests, there’s nothing in it that affects the measurement of assets or liabilities, nor the recognition of gains and losses.
On that basis, you might be forgiven for thinking that it’s a boring standard that has no real impact. But there’s nothing more important to the average user of the financial statements than an understanding of the profit reported by the business. But more of interest to students, there’s nothing more examiners like than testing a new standard.
Objective
IFRS 18 has the laudable objective of trying to ensure that the financial statements are relevant and faithful and was introduced because of investors’ concerns relating to the comparability and lack of transparency of financial statements.
Accordingly, IFRS 18 introduces some new requirements designed to improve the compatibility and transparency within the profit or loss.
These include defining five categories of income and expenditure and requiring three sub-totals in the profit or loss. This will naturally enhance consistency, improve comparability and increase the understanding of investors and other users.
Five and three
The five categories of income and expenditure are operating, investing, financing, income taxes, and discontinued operations. The three required sub-totals are operating profit, profit before financing and income taxes, and simply the profit or loss at the end.
Operating profit has been defined for the first time. Operating profit is the excess of all income over expenses classified in the operating category. There was a missed opportunity perhaps to require the sub total EBITDA and to capture into regulation an agreed definition of this widely used measure of performance.
Classification
The classification of income and expenses in profit or loss is based on the nature of the asset, liability or transaction from which they are derived. In other words, an impairment loss on an item of property, plant and equipment will be presented in profit or loss as an operating expense, whereas the impairment loss on an investment in an associate will be presented as an investing expense.
Confusingly, although IAS 7 Cash flow statements (IAS 7) also use the terminology of operating financing and investing, there is no alignment between the way that IFRS 18 and IAS 7 use the terminology.
For example, on the disposal of an item of PPE, any gain or loss will be reported in profit or loss as an operating expense, but the related sale proceeds will be reported in the cash flow statement as investing activities.
MPMs – a new term
The standard also introduces a new term, Management defined Performance Measures (MPMs). IFRS 18 requires MPMs to have their own disclosure note which will contain an explanation as to why the management believes the MPM it has identified provides useful information, a description of how the MPM is calculated, and a reconciliation of the MPM to the most directly comparable subtotal in the financial statements.
- Tom Clendon is an online lecturer who helps ACCA students pass their SBR exams. See www.tomclendon.co.uk. Tom is a three-time PQ award winner
